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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2000
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ______________ to ________________
Commission file number 0-20763
McLEODUSA INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 42-1407240
(State of Incorporation) (IRS Employer Identification No.)
McLeodUSA Technology Park
6400 C Street SW
P.O. Box 3177
Cedar Rapids, Iowa 52406-3177
(Address of principal executive office) (Zip Code)
319-364-0000
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No
The number of shares outstanding of each class of the issuer's common stock as
of August 3, 2000:
Common Stock Class A: ($.01 par value).............. 582,553,110 shares
Common Stock Class B: ($.01 par value).............. None
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INDEX
Page
----
PART I. Financial Information
- ------ ---------------------
Item 1. Financial Statements................................................................... 3
Consolidated Balance Sheets, June 30, 2000 (unaudited) and December 31, 1999........... 3
Unaudited Consolidated Statements of Operations and Comprehensive Income
for the three and six months ended June 30, 2000 and 1999........................... 4
Unaudited Consolidated Statements of Cash Flows for the six months ended
June 30, 2000 and 1999.............................................................. 5
Notes to Consolidated Financial Statements (unaudited)................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 12
PART II. Other Information
- ------- -----------------
Item 2. Changes in Securities and Use of Proceeds.............................................. 20
Item 4. Submission of Matters to a Vote of Security Holders.................................... 20
Item 6. Exhibits and Reports on Form 8-K....................................................... 21
Signatures...................................................................................... 23
2
PART I - FINANCIAL INFORMATION
Item 1.Financial Statements
McLEODUSA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except shares)
June 30, December 31,
2000 1999
----------- ------------
ASSETS Unaudited)
Current Assets
Cash and cash equivalents.............................................................. $ 931.3 $ 326.9
Investment in available-for-sale securities............................................ 324.5 934.1
Trade receivables, net................................................................. 266.2 183.8
Inventory.............................................................................. 33.2 27.5
Deferred expenses...................................................................... 39.7 39.2
Prepaid expenses and other............................................................. 52.1 58.0
-------- --------
TOTAL CURRENT ASSETS.................................................................. 1,647.0 1,569.5
-------- --------
Property and Equipment
Land and building...................................................................... 115.0 85.1
Telecommunications networks............................................................ 878.7 635.9
Furniture, fixtures and equipment...................................................... 349.2 267.2
Networks in progress................................................................... 841.1 453.2
Building in progress................................................................... 4.6 1.2
-------- --------
2,188.6 1,442.6
Less accumulated depreciation.......................................................... 290.6 172.6
-------- --------
1,898.0 1,270.0
-------- --------
Investments, Intangible and Other Assets
Other investments...................................................................... 32.9 35.9
Goodwill, net.......................................................................... 3,033.7 957.1
Other intangibles, net................................................................. 339.3 290.2
Other.................................................................................. 118.6 80.4
-------- --------
3,524.5 1,363.6
-------- --------
$7,069.5 $4,203.1
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt................................................... $ 299.0 $ 14.4
Contracts and notes payable............................................................ 0.1 0.1
Accounts payable....................................................................... 143.3 109.6
Accrued payroll and payroll related expenses........................................... 28.5 26.2
Other accrued liabilities.............................................................. 213.6 92.2
Deferred revenue, current portion...................................................... 71.9 24.1
Customer deposits...................................................................... 30.7 30.1
-------- --------
TOTAL CURRENT LIABILITIES............................................................. 787.1 296.7
Long-term Debt, less current maturities................................................. 2,370.4 1,763.8
Deferred Revenue, less current portion.................................................. 14.5 15.8
Other long-term liabilities............................................................. 19.1 18.3
-------- --------
3,191.1 2,094.6
-------- --------
Redeemable convertible preferred stock
Preferred, Series B, redeemable, convertible, $.01 par value, authorized, issued and
outstanding 2000 275,000 shares; 1999 275,000 shares................................ 687.5 687.5
Preferred, Series C, redeemable, convertible, $.01 par value, authorized, issued and
outstanding 2000 125,000 shares; 1999 125,000 shares................................ 312.5 312.5
-------- --------
1,000.0 1,000.0
-------- --------
Stockholders' Equity
Capital Stock:
Preferred, Series A, $.01 par value: authorized 1,150,000 shares; issued and
outstanding 2000 1,149,500 shares; 1999 1,150,000 shares.......................... --- ---
Common, Class A, $.01 par value; authorized 2,000,000,000 shares;
issued and outstanding 2000 578,571,887 shares; 1999 472,761,036
shares............................................................................... 5.8 4.8
Common, Class B, convertible, $.01 par value; authorized 22,000,000
shares; issued and outstanding 2000 and 1999 none.................................... --- ---
Additional paid-in capital............................................................. 3,497.3 1,523.5
Accumulated deficit.................................................................... (706.6) (494.5)
Accumulated other comprehensive income................................................. 81.9 74.7
-------- --------
2,878.4 1,108.5
-------- --------
$7,069.5 $4,203.1
======== ========
* Class A common stock and accumulated deficit are presented after giving
effect for the three-for-one stock split effected in the form of a stock
dividend as described in Note 4.
The accompanying notes are an integral part of these consolidated financial
statements
3
McLEODUSA INCORPORATED AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In millions, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2000 1999 2000 1999
------- ------ ------- -------
Revenues:
Telecommunications.............................................. $ 246.2 $142.9 $ 443.5 $ 253.2
Local exchange services......................................... 20.5 19.8 42.1 37.4
Directory....................................................... 59.8 55.2 124.6 104.6
Telemarketing................................................... 5.3 4.8 9.9 8.6
------- ------ ------- -------
TOTAL REVENUES................................................. 331.8 222.7 620.1 403.8
Operating expenses:
Cost of service................................................. 196.4 113.1 344.4 205.5
Selling, general and administrative............................. 134.3 98.5 256.6 178.4
Depreciation and amortization................................... 102.6 43.6 163.2 78.7
------- ------ ------- -------
TOTAL OPERATING EXPENSES....................................... 433.3 255.2 764.2 462.6
------- ------ ------- -------
OPERATING LOSS................................................. (101.5) (32.5) (144.1) (58.8)
Nonoperating income (expense):
Interest income................................................. 15.6 6.7 30.8 15.0
Interest (expense).............................................. (42.0) (36.2) (72.9) (65.7)
Other income.................................................... 2.2 0.6 2.0 0.6
------- ------ ------- -------
TOTAL NONOPERATING INCOME (EXPENSE)............................ (24.2) (28.9) (40.1) (50.1)
------- ------ ------- -------
LOSS BEFORE INCOME TAXES....................................... (125.7) (61.4) (184.2) (108.9)
Income taxes..................................................... --- --- --- ---
------- ------ ------- -------
NET LOSS....................................................... (125.7) (61.4) (184.2) (108.9)
Preferred stock dividend......................................... (13.6) --- (27.2) ---
------- ------ ------- -------
NET LOSS APPLICABLE TO COMMON SHARES........................... $(139.3) $(61.4) $(211.4) $(108.9)
======= ====== ======= =======
Loss per common share............................................ $ (0.24) $(0.14) $ (0.40) $ (0.26)
======= ====== ======= =======
Weighted average common shares outstanding....................... 578.6 449.4 529.1 423.2
======= ====== ======= =======
Other comprehensive income (loss), net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during the
period........................................................ (10.5) 9.5 9.5 17.7
Less: reclassification adjustment for gains included in
net income.................................................... (2.3) (0.6) (2.3) (0.7)
------- ------ ------- -------
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)........................ (12.8) 8.9 7.2 17.0
------- ------ ------- -------
COMPREHENSIVE LOSS............................................. $(152.1) $(52.5) $(204.2) $ (91.9)
======= ====== ======= =======
* Loss per common share and weighted average common shares outstanding are
presented after giving effect for the three-for-one stock split effected in the
form of a dividend as described in Note 4.
The accompanying notes are an integral part of these consolidated financial
statements
4
McLEODUSA INCORPORATED AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Six Months Ended
June 30,
----------------------------
2000 1999
-------- -------
Cash Flows from Operating Activities
Net loss............................................................................... $ (184.2) $(108.9)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation.......................................................................... 84.2 41.8
Amortization.......................................................................... 79.0 36.9
Accretion of interest on senior discount notes........................................ 21.0 19.0
Changes in assets and liabilities, net of effects of acquisitions:
(Increase) in trade receivables................................................... (70.0) (22.6)
(Increase) in inventory........................................................... (5.7) (14.4)
(Increase) decrease in deferred expenses.......................................... (0.4) 0.2
Decrease in prepaid expenses and other............................................ 47.2 6.2
(Increase) in deferred line installation costs.................................... (14.4) (6.2)
(Decrease) in accounts payable and accrued expenses............................... (16.0) (3.1)
Increase in deferred revenue...................................................... 46.4 2.2
Increase in customer deposits..................................................... 0.4 7.0
-------- -------
NET CASH (USED IN) OPERATING ACTIVITIES......................................... (12.5) (41.9)
-------- -------
Cash Flows from Investing Activities
Purchases of property and equipment.................................................... (555.3) (220.7)
Available-for-sale securities:
Purchases............................................................................. (408.8) (348.6)
Sales................................................................................. 0.6 79.5
Maturities............................................................................ 1,049.2 150.3
Business Acquisitions.................................................................. (19.7) (170.3)
Other.................................................................................. (5.7) (8.4)
-------- -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 60.3 (518.2)
-------- -------
Cash Flows from Financing Activities
Payments on contracts and notes payable................................................ ---- (12.9)
Net proceeds from preferred stock...................................................... (1.0) ----
Net proceeds from long-term debt....................................................... 555.7 486.4
Payments on long-term debt............................................................. (14.9) (121.6)
Net proceeds from issuance of common stock............................................. 34.3 3.6
Payments of preferred stock dividends.................................................. (17.5) ----
-------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES...................................... 556.6 355.5
-------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................... 604.4 (204.6)
Cash and cash equivalents:
Beginning.............................................................................. 326.9 455.1
-------- -------
Ending................................................................................. $ 931.3 $ 250.5
======== =======
Supplemental Disclosure of Cash Flow Information:
Cash payment for interest.............................................................. $ 58.6 $ 40.2
======== =======
Supplemental Schedule of Noncash Investing and Financing Activities
Capital leases incurred for the acquisition of property and equipment.................. $ 6.1 $ 3.0
======== =======
The accompanying notes are an integral part of these consolidated financial
statements
5
McLEODUSA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the Three and Six Months Ended
June 30, 2000 and 1999 is Unaudited)
Note 1: Basis of Presentation
Interim Financial Information (unaudited): The financial statements and
related notes as of June 30, 2000, and for the three and six month periods ended
June 30, 2000 and 1999, are unaudited, but in the opinion of management include
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of our financial position and results of operations. The
operating results for the interim periods are not indicative of the operating
results to be expected for a full year or for other interim periods. Certain
information and footnote disclosure normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to instructions, rules and regulations prescribed
by the Securities and Exchange Commission ("SEC"). Although we believe that the
disclosures provided are adequate to make the information presented not
misleading, we recommend that you read these consolidated condensed financial
statements in conjunction with the audited consolidated financial statements and
the related footnotes included in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999, filed with the SEC on March 30, 2000.
Reclassifications: Certain items in the unaudited statement of operations
for the three and six month period ended June 30, 1999 have been reclassified to
be consistent with the presentation in the June 30, 2000 unaudited financial
statements.
Note 2: Supplemental Asset Data
Cash and cash equivalents: For purposes of reporting cash flows, we
consider all highly liquid debt instruments purchased with a maturity of three
months or less and all certificates of deposit, regardless of maturity, to be
cash equivalents.
Trade Receivables: The composition of trade receivables, net, is as
follows:
June 30, December 31,
2000 1999
------ ------
(In millions)
Trade Receivables:
Billed........................................ $247.0 $165.7
Unbilled...................................... 69.0 59.5
------ ------
316.0 225.2
Allowance for doubtful accounts and discounts.... (49.8) (41.4)
------ ------
$266.2 $183.8
====== ======
Inventory: Inventory is carried principally at the lower of average cost or
market and consists primarily of new and reusable parts required to maintain
fiber optic networks and parts and equipment used in the maintenance and
installation of telephone systems.
Goodwill: Goodwill resulting from our acquisitions is being amortized over
a range of 15 to 30 years using the straight-line method and is periodically
reviewed for impairment based upon an assessment of future operations to ensure
that it is appropriately valued. Accumulated amortization on goodwill totaled
$104.0 million and $52.1 million, at June 30, 2000 and December 31, 1999,
respectively.
6
Other intangibles: Other intangibles consist of customer lists and
noncompete agreements related to our acquisitions, deferred line installation
costs incurred in the establishment of local access lines for customers and
franchise rights to provide cable services to customers in three Illinois
counties and in a Michigan city. The customer lists and noncompete agreements
are being amortized using the straight-line method over periods ranging from 3
to 15 years. The deferred line installation costs are being amortized using the
straight-line method over 36 to 60 months, which approximates the average lives
of residential and business customer contracts. The franchise rights are being
amortized using the straight-line method over periods ranging from 10 to 15
years. Accumulated amortization on the other intangibles totaled $86.2 million
and $60.7 million at June 30, 2000 and December 31, 1999, respectively.
Note 3: Acquisitions
Talking Directories, Inc. (Talking Directories) and Info America Phone
Books, Inc. (Info America): On February 10, 1999, we acquired Talking
Directories in exchange for 15.3 million shares of our Class A common stock, par
value $.01 per share ("Class A common stock") after giving effect to the three-
for-one stock split described in Note 4. In a related and concurrent
transaction, on February 10, 1999, we acquired Info America in exchange for 7.2
million shares of our Class A common stock. We also paid outstanding
obligations of Talking Directories and Info America of approximately $27
million.
Dakota Telecommunications Group, Inc. (DTG): On March 5, 1999, we acquired
DTG in exchange for approximately 5.7 million shares of our Class A common
stock, after giving effect to the three-for-one stock split described in Note 4,
and the assumption of approximately $31 million in DTG debt.
Ovation Communications, Inc. (Ovation): On March 31, 1999, we acquired
Ovation in exchange for approximately 33.6 million shares of our Class A common
stock, after giving effect to the three-for-one stock split described in Note 4,
and the payment of approximately $121.3 million in cash to the stockholders of
Ovation. The total purchase price was approximately $310.2 million based on the
average closing price of our Class A common stock five days before and after the
date of the acquisition agreement. The Company also assumed approximately $105.6
million in Ovation debt.
Splitrock Services, Inc. (Splitrock): On March 30, 2000, we acquired
Splitrock pursuant to the Amended Plan of Merger dated February 11, 2000. The
acquisition of Splitrock was effected through two separate but related
transactions: (1) a holding company reorganization, in which Splitrock Services,
Inc. became a wholly owned subsidiary of its former subsidiary, Splitrock
Holdings; and (2) a merger of Southside Acquisition Corporation, a Delaware
corporation and wholly owned subsidiary of McLeodUSA, with and into Splitrock
Holdings in which Splitrock Holdings was the surviving corporation and became a
wholly owned subsidiary of McLeodUSA.
Pursuant to these transactions, each common stockholder of Splitrock
ultimately received 0.5347 of a share of Class A common stock of McLeodUSA in
exchange for each share of Splitrock common stock owned. We issued
approximately 93.2 million shares of Class A common stock, after giving effect
for the three-for-one stock split described in Note 4. The total purchase price
was approximately $2.3 billion based on the average closing price of our Class A
common stock five days before and after January 6, 2000, the initial date of the
Merger Agreement. Approximately $261 million in Splitrock debt remained
outstanding after the closing. This debt subsequently has been paid off (see
Note 7). The purchase price includes approximately $29.4 million of direct
acquisition costs.
7
The following table summarizes the purchase price allocations we incurred
for business acquisitions incurred in the six months ended June 30, 2000 and
1999 (in millions):
Transaction Year: 2000 1999
----------------- -------- -------
Cash purchase price $ 19.7 $ 170.2
Acquisition costs 43.7 0.1
Promissory notes 49.6 6.7
Stock issued 1,836.7 349.0
Option agreements 103.2 0.9
Note receivable -- (1.7)
-------- -------
$2,052.9 $ 525.2
======== =======
Working capital acquired, net $ 15.5 $ (21.3)
Fair value of other assets acquired 184.5 127.3
Intangibles 2,143.6 575.4
Liabilities assumed (290.7) (156.2)
-------- -------
$2,052.9 $ 525.2
======== =======
These acquisitions have been accounted for as purchases and the results of
operations are included in the consolidated financial statements since the dates
of acquisition. All 2000 purchase price allocations are preliminary and subject
to revisions.
The unaudited consolidated results of operations for the six months ended
June 30, 2000 and 1999 on a pro forma basis as though the above entities had
been acquired as of the beginning of the period is as follows (in millions,
except per share data):
2000 1999
------- -------
Revenue.................................... $ 655.4 $ 510.1
Net loss applicable to common shares....... (275.8) (228.0)
Loss per common share...................... (0.48) (0.41)
The pro forma financial information is presented for informational purposes
only and is not necessarily indicative of the operating results that would have
occurred had the acquisitions been consummated as of the above dates, nor are
such operating results necessarily indicative of future operating results.
Note 4: Common Stock Split
On February 29, 2000, we announced a three-for-one stock split in the form of
a stock dividend on our Class A common stock. The record date for the stock
split was April 4, 2000 and the distribution of the additional shares took place
on April 24, 2000. All share data in the consolidated financial statements and
notes to the financial statements have been adjusted to reflect the stock split.
Note 5: Information by Business Segment
We operate predominantly in the business of providing local, long distance and
related communications services to end-users, selling advertising space in
telephone directories and supplying end-to-end data communications. The three
business segments have separate management teams and infrastructures that offer
different products and services. The principal elements of these segments are
to (1) provide integrated communications services, provide outstanding customer
service, expand fiber optic network and expand intra-city fiber network build,
(2) publish and distribute directories to local area subscribers, and (3)
provide end-to-end data communications. The acquisition of Splitrock on March
30, 2000 introduced our third business segment: end-to-end data communications
services on the Splitrock network. Since the data segment was part of McLeodUSA
for only one day in the first quarter ended March 31, 2000, operating statement
information for the six month period ended June 30, 2000 reflects only the data
segment's second quarter activity in the segment information table below.
8
We evaluate the performance of our operating segments based on earnings before
interest, taxes, depreciation and amortization, excluding general corporate
expenses ("EBITDA"). The accounting policies of the reportable segments are the
same as those described in Note 1 of our Annual Report on Form 10-K for the
fiscal year ended December 31, 1999. Intersegment transfers are accounted for
on an arm's length pricing basis.
Identifiable assets (excluding intersegment receivables) are our assets that
are identified in each business segment. Corporate assets primarily include
cash and cash equivalents, investments in available-for-sale securities,
administrative headquarters and goodwill recorded primarily as a result of the
acquisition of Consolidated Communications, Inc. in 1997, the acquisitions of
DTG and Ovation in 1999 and the acquisition of Splitrock in 2000.
In the three and six months ended June 30, 2000 and 1999, no single customer
or group under common control represented 10% or more of our sales.
Segment information for the three and six months ended June 30, 2000 and 1999
was as follows (in millions):
Telecommunications Directories Data Corporate Total
------------------ ----------- ------- ---------- ---------
Three months ended
June 30, 2000
Revenues $ 233.8 $ 60.8 $ 37.2 $ - $ 331.8
==================================================================
EBITDA $ 10.4 $ 13.5 $(13.9) $ (8.9) $ 1.1
Depreciation and Amortization (41.6) (7.6) (11.0) (42.4) (102.6)
Interest Income 0.5 0.2 0.5 14.4 15.6
Interest Expense (1.0) -- (8.3) (32.7) (42.0)
Taxes and Other 4.0 -- (5.2) 3.4 2.2
------------------------------------------------------------------
Net Income (Loss) $ (27.7) $ 6.1 $(37.9) $ (66.2) $ (125.7)
==================================================================
Six months ended
June 30, 2000
Revenues $ 456.6 $126.3 $ 37.2 $ -- $ 620.1
==================================================================
EBITDA $ 20.7 $ 26.5 $(13.9) $ (14.2) $ 19.1
Depreciation and Amortization (78.6) (15.0) (11.0) (58.6) (163.2)
Interest Income 0.8 0.3 0.5 29.2 30.8
Interest Expense (1.9) -- (8.3) (62.7) (72.9)
Taxes and Other 1.7 -- (5.2) 5.5 2.0
------------------------------------------------------------------
Net Income (Loss) $ (57.3) $ 11.8 $(37.9) $ (100.8) $ (184.2)
==================================================================
As of June 30, 2000
Total assets $2,257.9 $483.5 $258.1 $ 4,070.0 $7,069.5
Three months ended
June 30, 2000
Capital expenditures $ 271.5 $ 22.3 $ 37.7 $ 9.6 $ 341.1
Six months ended
June 30, 2000
Capital expenditures $ 514.5 $ 43.0 $ 37.7 $ 2,017.6 $2,612.8
9
Telecommunications Directories Data Corporate Total
------------------ ----------- ---- --------- ----------
Three months ended
June 30, 1999
Revenues $ 166.9 $ 55.8 $ -- $ -- $ 222.7
================================================================
EBITDA $ 8.6 $ 8.2 $ -- $ (5.7) $ 11.1
Depreciation and Amortization (25.6) (7.6) -- (10.4) (43.6)
Interest Income 0.4 -- -- 6.3 6.7
Interest Expense (1.6) -- -- (34.6) (36.2)
Taxes and Other 0.7 (0.1) -- -- 0.6
----------------------------------------------------------------
Net Income (Loss) $ (17.5) $ 0.5 $ -- $ (44.4) $ (61.4)
================================================================
Six months ended
June 30, 1999
Revenues $ 298.2 $105.6 $ -- $ -- $ 403.8
================================================================
EBITDA $ 14.4 $ 17.4 $ -- $ (11.9) $ 19.9
Depreciation and Amortization (45.1) (17.2) -- (16.4) (78.7)
Interest Income 0.8 -- -- 14.2 15.0
Interest Expense (3.0) -- -- (62.7) (65.7)
Taxes and Other 0.9 (0.1) -- (0.2) 0.6
----------------------------------------------------------------
Net Income (Loss) $ (32.0) $ 0.1 $ -- $ (77.0) $ (108.9)
================================================================
As of June 30, 1999
Total assets $1,156.6 $434.0 $ -- $1,249.5 $2,840.1
Three months ended
June 30, 1999
Capital expenditures $ 130.4 $ 64.3 $ -- $ (8.0) $ 186.7
Six months ended
June 30, 1999
Capital expenditures $ 340.7 $195.4 $ -- $ 189.5 $ 725.6
Note 6: Long-term Debt
On May 31, 2000 we put in place $1.3 billion of Senior Secured Credit
Facilities (together the "Credit Facilities") with a syndicate of financial
institutions. The Credit Facilities consist of (1) a seven year Senior Secured
Revolving Facility with an aggregate principal amount of $450 million (the
"Revolving Facility), (2) a seven year Senior Secured Multi-Draw Term Loan
Facility with an aggregate principal amount of $275 million ("Tranche A Term
Facility"), and (3) an eight year single draw Senior Secured Term Loan with an
aggregate principal amount of $575 million ("Tranche B Term Facility"). The
Tranche A Term Facility provides for multiple ($50 million minimum) draws for
the first 24 months of the agreement at which time any undrawn commitments
expire. At June 30, 2000 the Tranche B Term Facility was drawn in full and the
balance of the other Facilities remained undrawn.
The Credit Facilities are secured by 1) a first priority pledge of all the
capital stock owned by us and by each subsidiary, and 2) a perfected first
priority security interest in substantially all our tangible and intangible
assets and, to the extent of $100 million, by each subsidiary. In addition,
telecommunications assets acquired with proceeds or refinanced from the Credit
Facilities serve as collateral.
Interest on the Credit Facilities is payable quarterly and variable at
LIBOR plus 1% to LIBOR plus 3.25% based on the Company's debt rating. At our
current debt rating, interest rates are LIBOR plus 2.25% on the Revolving
Facility and Tranche A Term Facility, and LIBOR plus 3.00% on the Tranche B Term
Facility. A commitment fee of 0.5% to 1.0% is charged on the undrawn portion of
the commitment relating to the Revolving Facility and the Tranche A Term
Facility. We must maintain certain financial covenants requiring minimum
revenue, minimum access lines and debt to capital and debt to EBITDA ratios.
Note 7. Subsequent Events
On July 11, 2000 we completed our offer, commenced May 31, 2000, to
purchase all of the outstanding 11.75% Senior Notes of Splitrock Services, Inc.,
a wholly owned subsidiary, due 2008. Our
10
cost to repurchase the notes was the aggregate of the principal amount of $260.9
million plus accrued interest and call premium of $55.4 million.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Statements included in this discussion relating, but not limited, to future
revenues, operating expenses, capital requirements, growth rates, cash flows,
operational performance, sources and uses of funds, acquisitions, technological
changes and development of a PCS system, are forward-looking statements that
involve certain risks and uncertainties. Factors that may cause the actual
results, performance, achievements or investments expressed or implied by such
forward-looking statements to differ materially from any future results,
performance, achievements or investments expressed or implied by such forward-
looking statements include, among other things, the availability of financing
and regulatory approvals, the number of potential customers in a target market,
the existence of strategic alliances and relationships, technological,
regulatory or other developments in the Company's business, changes in the
competitive climate in which the Company operates and the emergence of future
opportunities and other factors more fully described under the caption
"Business--Risk Factors" in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999, filed with the Securities and Exchange
Commission on March 30, 2000 and which section is incorporated herein by
reference.
Unless otherwise indicated, all dollar amounts in the following
Management's Discussion and Analysis of Financial Condition and Results of
Operations that exceed $1 million have been rounded to one decimal place and all
dollar amounts less than $1 million have been rounded to the nearest thousand.
All share data in the consolidated financial statements and notes to the
financial statements have been adjusted to reflect the April 24, 2000 three-for-
one stock split of our Class A common stock.
Overview
We derive most of our revenue from:
. our core business of providing local, long distance and related
communications services to end-users, typically in a bundled package
. the sale of advertising space in telephone directories
. traditional local telephone company services through the operations of
Illinois Consolidated Telephone Company ("ICTC") in east central
Illinois and Dakota Telecommunications Group, Inc. in southeast South
Dakota
. communications facilities and services dedicated for a particular
customer's use
We also derive revenue from:
. data services
. communications network maintenance services
. telephone equipment sales, leasing, service and installation
. video services
. telemarketing services
. computer networking services
. other communications services, including cellular, operator, payphone,
and paging services
The table set forth below summarizes our percentage of revenues from these
sources:
12
Quarter Ended June 30,
----------------------
2000 1999
---- ----
Telecommunication services.................................... 74% 64%
Telephone directory advertising............................... 18 25
Traditional local telephone company services.................. 6 9
Telemarketing services........................................ 2 2
---- ----
100% 100%
==== ====
We began offering local and long distance services to business customers in
January 1994. In June 1996, we began marketing and providing to residential
customers in Cedar Rapids, Iowa and Iowa City, Iowa an integrated package of
communications services that includes local and long distance service, voice
mail, Internet access and travel card services. Since June 1996, we have
expanded the states in which we offer service to business customers to include
Iowa, Illinois, Indiana, Michigan, Minnesota, Nebraska, Wisconsin, North Dakota,
South Dakota, Colorado, Missouri, Utah, Washington, Ohio, Oregon, Idaho and
Wyoming. We also expanded our residential service to additional cities in Iowa
and Illinois and began offering the service to customers in North Dakota, South
Dakota, Wisconsin, Wyoming, Colorado, and Michigan. We plan to continue our
efforts to market and provide local, long distance and other communications
services to business customers and market our service to residential customers.
Our principal operating expenses consist of cost of service; selling,
general and administrative expenses ("SG&A"); and depreciation and amortization.
Cost of service primarily includes local services purchased from the MegaBells,
costs to terminate the long distance calls of our customers through long
distance carriers, costs of printing and distributing telephone directories and
costs associated with maintaining the Iowa Communications Network. The Iowa
Communications Network is a fiber optic communications network that links many
schools, libraries and other public buildings in the state of Iowa. SG&A
consist of sales and marketing, customer service and administrative expenses,
including the costs associated with operating our communications network.
Depreciation and amortization include depreciation of our telecommunications
network and equipment; amortization of goodwill and other intangibles related to
our acquisitions, amortization expense related to the excess of estimated fair
market value in aggregate of options over the aggregate exercise price of such
options granted to some of our officers, other employees and directors; and
amortization of one-time installation costs associated with transferring
customers' local line service from the regional Bell operating companies to our
local telecommunications service.
As we expand into new markets, both cost of service and SG&A will increase.
We expect to incur cost of service and SG&A expenses before achieving
significant revenues in new markets. Fixed costs related to leasing of central
office facilities needed to provide telephone services must be incurred prior to
generating revenue in new markets, while significant levels of marketing
activity may be necessary in the new markets in order for us to build a customer
base large enough to generate sufficient revenue to offset such fixed costs and
marketing expenses.
We have experienced operating losses since our inception as a result of
efforts to build our customer base, develop and construct our communications
network infrastructure, build our internal staffing, develop our systems and
expand into new markets. We expect to continue to focus on increasing our
customer base and geographic coverage and bringing our customer base onto our
communications network. Accordingly, we expect that our cost of service, SG&A
and capital expenditures will continue to increase significantly, all of which
may have a negative impact on operating results.
In addition, our projected increases in capital expenditures will continue
to generate negative cash flows from construction activities during the next
several years while we install and expand our fiber optic communications network
and develop wireless services. We may also be forced to change our pricing
policies to respond to a changing competitive environment, and we cannot assure
you that we will be able to maintain our operating margin. We cannot assure you
that growth in our revenue or customer base will continue or that we will be
able to achieve or sustain profitability or positive cash flows.
13
We have generated net operating losses since our inception and,
accordingly, have incurred no income tax expense. We have reduced the net
deferred tax assets generated by these losses by a valuation allowance which
offsets the net deferred tax asset due to the uncertainty of realizing the
benefit of the tax loss carry forwards. We will reduce the valuation allowance
when, based on the weight of available evidence, it is more likely than not that
some portion or all of the deferred tax assets will be realized.
Three Months Ended June 30, 2000 Compared with Three Months Ended June 30, 1999
Total revenue increased from $222.7 million for the three months ended June
30, 1999 to $331.8 million for the three months ended June 30, 2000,
representing an increase of $109.1 million or 49%. The increase was due to the
acquisitions completed in 2000 as well as the increase in telecommunications
customers. Revenue from the sale of telecommunications services accounted for
$103.3 million of the increase, including $37.2 million contributed by Splitrock
Services, Inc. ("Splitrock") which was acquired in early 2000. Directory
revenues increased $4.6 million from the second quarter of 1999 to the second
quarter of 2000 due mainly to revenues from new directories acquired in 1999.
Local exchange services generated $0.7 million in additional revenues over the
same period in 1999. Telemarketing revenues in the second quarter of 2000
increased $0.5 million when compared to the same period in 1999.
Cost of service increased from $113.1 million for the three months ended
June 30, 1999, to $196.4 million for the three months ended June 30, 2000,
representing an increase of $83.3 million or 74%. This increase in cost of
service was due primarily to the growth in our local and long distance
telecommunications and to the acquisition Splitrock which contributed an
aggregate of $45.3 million to the increase. Cost of service as a percentage of
revenue increased to 59% for the three months ended June 30, 2000, due
primarily to the Splitrock acquisition. For the three months ended June 30,
2000, Splitrock's network costs as a percentage of their revenue was 122%.
SG&A increased from $98.5 million for the three months ended June 30, 1999
to $134.3 million for the three months ended June 30, 2000, an increase of $35.8
million or 36%. Our acquisition of Splitrock contributed $5.8 million to the
increase. Also contributing to this increase were increased costs related
primarily to expansion of selling, customer support and administrative
activities to support our growth.
Depreciation and amortization expenses increased from $43.6 million for the
three months ended June 30, 1999 to $102.6 million for the three months ended
June 30, 2000, representing an increase of $59.0 million or 135%. This increase
related primarily to the acquisition of Splitrock and to the growth of our
network.
Interest income increased from $6.7 million for the three month period
ended June 30, 1999, to $15.6 million for the same period in 2000. This
increase resulted from a higher average investment balance during 2000.
Gross interest expense increased from $41.6 million for the second quarter
of 1999 to $55.3 million for the second quarter of 2000. This increase was
primarily a result of an increase in the accretion of interest on our 10 1/2%
senior discount notes of $1.0 million and to the acquisition of Splitrock which
contributed $8.3 million to the increase. Interest expense of approximately
$13.3 and $5.4 million was capitalized as part of our construction of fiber
optic network during the second quarter of 2000 and 1999, respectively.
Net loss applicable to common shares increased from $61.4 million for the
three months ended June 30, 1999 to $139.3 million for the three months ended
June 30, 2000, an increase of $77.9 million. This increase resulted primarily
from the following four factors: (1) the expansion of our local and long
distance services, which requires significant expenditures, a substantial
portion of which is incurred before the realization of revenues; (2) the
increased depreciation expense related to the construction and expansion of our
communications networks and amortization of intangibles related to acquisitions;
(3) net interest expense on indebtedness to fund market expansion, network
development and acquisitions, and (4) dividends on preferred stock issued.
14
Six Months Ended June 30, 2000 Compared with Six Months Ended June 30, 1999
Total revenue increased from $403.8 million for the six months ended June
30, 1999 to $620.1 million for the six months ended June 30, 2000, representing
an increase of $216.3 million or 54%. Our 1999 acquisitions of Talking
Directories Inc. and Info America Phone Books, Inc. (together, "Talking
Directories"), DTG, Ovation and Access and our acquisition of Splitrock in 2000
contributed to the increase. Revenue from the sale of competitive
telecommunications services, including the contributions of acquisitions in 1999
and 2000, accounted for $190.3 million of this increase. Local exchange
services generated $4.7 million additional revenues over the same period in
1999. Directory revenues increased $20.0 million from the first six months of
1999 to the first six months of 2000. Telemarketing revenues increased $1.3
million for the six months ended June 30, 2000 when compared to the six months
ended June 30, 1999.
Cost of service increased from $205.5 million for the six months ended June
30, 1999, to $344.4 million for the six months ended June 30, 2000, representing
an increase of $138.9 million or 68%. This increase in cost of service was due
primarily to the growth in the Company's local and long distance
telecommunications. Cost of service as a percentage of revenue increased from
51% for the six months ended June 30, 1999 to 56% for the six months ended June
30, 2000, primarily due to the Splitrock acquisition. The network costs of
Splitrock from acquisition date through June 30, 2000 as a percentage of their
revenue was 122%.
SG&A increased from $178.4 million for the six months ended June 30, 1999
to $256.6 million for the six months ended June 30, 2000, an increase of $78.2
million or 44%. Our 1999 acquisitions of Talking Directories Inc. and Info
America Phone Books, Inc. (together, "Talking Directories"), DTG, Ovation and
Access and our acquisition of Splitrock in 2000 contributed to the increase.
Also contributing to this increase were increased costs related primarily to
expansion of selling, customer support and administration activities to support
our growth.
Depreciation and amortization expenses increased from $78.7 million for the
six months ended June 30, 1999 to $163.2 million for the six months ended June
30, 2000, representing an increase of $84.5 million or 107%. This increase
consisted of $44.7 million related to the acquisitions of Talking Directories,
DTG, Ovation, Access and Splitrock and $39.8 million due primarily to the growth
of the Company's network.
Interest income increased from $15.0 million for the six-month period ended
June 30, 1999, to $30.8 million for the same period in 1999. This increase
resulted from a higher average investment balance during 2000.
Gross interest expense increased from $75.3 million for the first six
months of 1999 to $96.4 million for the first six months of 2000. This increase
was primarily a result of an increase in the accretion of interest on our 10
1/2% senior discount notes of $2.0 million and to the acquisition of Splitrock
which contributed an aggregate of $8.3 million to the increase. Interest
expense of approximately $23.5 and $9.6 million was capitalized as part of the
Company's construction of fiber optic network during the second quarter of 2000
and 1999, respectively.
Net loss applicable to common shares increased from $108.9 million for the
six months ended June 30, 1999 to $211.4 million for the six months ended June
30, 2000, an increase of $102.5 million. This increase resulted primarily from
the following four factors: (1) the expansion of our local and long distance
services, which requires significant expenditures, a substantial portion of
which is incurred before the realization of revenues; (2) the increased
depreciation expense related to the construction and expansion of our
communications networks and amortization of intangibles related to acquisitions;
(3) net interest expense on indebtedness to fund market expansion, network
development and acquisitions, and (4) dividends on preferred stock issued.
Liquidity and Capital Resources
Our total assets increased from $4.2 billion at December 31, 1999 to $7.1
billion at June 30, 2000. The increase is primarily due to the acquisition
related intangibles of approximately $2.1 billion resulting from the acquisition
of Splitrock. At June 30, 2000, our current assets of $1,647.0 million exceeded
our current liabilities of $787.1 million, providing working capital of $859.9
million, which represents a
15
decrease in working capital of $412.9 million compared to December 31, 1999. At
December 31, 1999, our current assets of $1,569.5 million exceeded current
liabilities of $296.7 million, providing working capital of $1,272.8 million.
The net cash used in operating activities totaled $12.5 million for the six
months ended June 30, 2000 and $41.9 million for the six months ended June 30,
1999. During the six months ended June 30, 2000, cash used in operating
activities was used primarily to fund our net loss of $184.2 million for such
period. Primarily as a result of the expansion of our competitive
telecommunications services, we also required cash to fund:
. growth in trade receivables of $70.0 million
. growth in inventory of $5.7 million
. increases in deferred expenses of $0.4 million
. increases in deferred line installation costs of $14.4 million
. decreases in accounts payable and accrued expenses of $16.0
These amounts were partially offset by:
. decreases in prepaid and other expenses of $47.2 million
. increases in deferred revenue of $46.4 million
. increases in customer deposits of $0.4 million
. cumulative non-cash expenses of $184.2 million
During the six months ended June 30, 1999, cash for operating activities
was used primarily to fund our net loss of $108.9 million for the period. We
also required cash to fund the growth in trade receivables, inventory and
deferred line installation costs of $22.6 million, $14.4 million and $6.2
million, respectively, and to decrease accounts payable and accrued expenses of
$3.1 million. These uses of cash for operating activities during the six months
ended June 30, 1999, were offset by decreases in prepaid expenses and deferred
expenses of $6.2 million and $0.2 million, respectively, and increases in
deferred revenue and customer deposits of $2.2 million and $7.0 million,
respectively, and cumulative non-cash expenses of $97.7 million.
Our investing activities provided cash of $60.3 million during the six
months ended June 30, 2000 and used cash of $518.2 million during the six months
ended June 30, 1999. The equipment required for the expansion of our local and
long distance telecommunications services, our development and construction of
fiber optic telecommunications network and other capital expenditures resulted
in purchases of equipment and fiber optic cable and other property and equipment
totaling $555.3 million and $220.7 million during the six months ended June 30,
2000 and 1999, respectively. We also used cash of $408.8 million and $348.6
million to acquire available-for-sale securities during the first six months of
2000 and 1999, respectively, offset by proceeds from sales and maturities of
available-for-sale securities of $1,049.8 million and $229.8 million,
respectively, during those periods.
During the six months ended June 30, 2000 and March 31, 1999, we used
aggregate cash of $19.7 million and $170.3 million, respectively, to acquire
various directories and other telecommunication businesses.
Net cash received from financing activities was $556.6 million during the
six months ended June 30, 2000 and was primarily obtained from our credit
facility in May 2000. Net cash received from financing activities during the
six months ended June 30, 1999 was $355.5 million and was primarily obtained
from our offering of our 8.125% senior notes in February 1999.
16
On May 31, 2000 we put in place $1.3 billion of Senior Secured Credit
Facilities (together the "Credit Facilities") with a syndicate of financial
institutions. The Credit Facilities consist of (1) a seven year Senior Secured
Revolving Facility with an aggregate principal amount of $450 million (the
"Revolving Facility), (2) a seven year Senior Secured Multi-Draw Term Loan
Facility with an aggregate principal amount of $275 million ("Tranche A Term
Facility"), and (3) an eight year single draw Senior Secured Term Loan with an
aggregate principal amount of $575 million ("Tranche B Term Facility"). The
Tranche A Term Facility provides for multiple ($50 million minimum) draws for
the first 24 months of the agreement at which time any undrawn commitments
expire. At June 30, 2000 the Tranche B Term Facility was drawn in full and the
balance of the other Facilities remained undrawn.
On February 22, 1999, we completed an offering of $500.0 million aggregate
principal amount of our 8.125% senior notes in which we received net proceeds of
approximately $485.8 million. Interest on the 8.125% senior notes is payable in
cash semi-annually in arrears on February 15 and August 15.
Our 10.5% senior discount notes, 9.25% senior notes, 8.375% senior notes,
9.5% senior notes and 8.125% senior notes are senior unsecured obligations of
McLeodUSA Incorporated, the parent company, ranking pari passu in right of
payment with all other existing and future senior unsecured obligations of
McLeodUSA and senior to all existing and future subordinated debt of McLeodUSA.
The 10.5% senior discount notes, 9.25% senior notes, 8.375% senior notes, 9.5%
senior notes and 8.125% senior notes are effectively subordinated to all
existing and future secured indebtedness of McLeodUSA and our subsidiaries to
the extent of the value of the assets securing such indebtedness. The 10.5%
senior discount notes, 9.25% senior notes, 8.375% senior notes, 9.5% senior
notes and 8.125% senior notes also are effectively subordinated to all existing
and future third-party indebtedness and other liabilities of our subsidiaries.
Our Credit Facilities are secured by 1) a first priority pledge of all the
capital stock owned by us and by each subsidiary, and 2) a perfected first
priority security interest in substantially all our tangible and intangible
assets and, to the extent of $100 million, by each subsidiary. In addition,
telecommunications assets acquired with proceeds or refinanced from the Credit
Facilities serve as collateral.
The indentures governing our 10.5% senior discount notes, 9.25% senior
notes, 8.375% senior notes, 9.5% senior notes and 8.125% senior notes and our
Credit Facilities impose operating and financial restrictions on our
subsidiaries and us. These restrictions affect, and in many cases significantly
limit or prohibit, among other things, our ability to:
. incur additional indebtedness
. pay dividends or make distributions in respect of our or our
subsidiaries' capital stock
. redeem capital stock
. make investments or other restricted payments
. enter into sale and leaseback transactions
. pledge, mortgage or create liens upon assets
. enter into transactions with affiliates or related persons
. sell assets
. consolidate, merge or sell all or substantially all of our assets
On July 11, 2000 we completed our offer, commenced May 31, 2000, to
purchase all of the outstanding 11.75% Senior Notes of Splitrock Services, Inc.,
a wholly owned subsidiary, due 2008. Our cost to repurchase the notes was the
principal amount of $260.9 million plus accrued interest and call premium of
$55.4 million.
17
We cannot assure you that the covenants and encumbrances in our various
indentures and in our Credit Facilities will not adversely affect our ability to
finance our future operations or capital needs or to engage in other business
activities that may be in our interests.
As of June 30, 2000, based on our business plan, capital requirements and
growth projections as of that date, we estimated that we would require
approximately $1.9 billion through 2002. Our estimated aggregate capital
requirements include the projected costs of:
. building our fiber optic communications network, including intra-city
fiber optic communications networks
. adding voice and ATM switches
. expanding operations in existing and new markets
. developing wireless services
. funding general corporate expenses
. constructing, acquiring, developing or improving telecommunications
assets
We expect to use the following to address our capital needs:
. approximately $1,255.8 million of cash and investments on hand at June
30, 2000
. $725 million of current availability under our Credit Facilities
. projected operating cash flow
Our estimate of future capital requirements is a forward-looking statement
within the meaning of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. The actual amount and timing of our future
capital requirements may differ substantially from our estimate due to factors
such as:
. strategic acquisition costs and effects of acquisitions on our business
plan, capital requirements and growth projections
. unforeseen delays
. cost overruns
. engineering design changes
. changes in demand for our services
. regulatory, technological or competitive developments
. new opportunities
We also expect to evaluate potential acquisitions, joint ventures and
strategic alliances on an ongoing basis. We may require additional financing if
we pursue any of these opportunities. Accordingly, we may need additional
capital to continue to expand our markets, operations, facilities, network and
services.
We may meet any additional capital needs by issuing additional debt or
equity securities or borrowing funds from one or more lenders. We cannot assure
you that we will have timely access to additional financing sources on
acceptable terms.
Failure to generate or raise sufficient funds may require us to delay or
abandon some of our expansion plans or expenditures, which could have a material
adverse effect on our business, results of operations or financial condition.
See "Business--Risk Factors--Failure to Raise Necessary Capital Could Restrict
Our Ability to Develop Our Network and Services and Engage in Strategic
Acquisitions" in our Annual Report on Form 10-K.
18
Market Risk
At June 30, 2000, we recorded the marketable equity securities that we hold
at a fair value of $98.8 million. These securities have exposure to price risk.
A hypothetical ten percent adverse change in quoted market prices would amount
to a decrease in the recorded value of investments of approximately $9.9
million. We believe our exposure to market price fluctuations on all other
investments is nominal due to the short-term nature of our investment portfolio.
We have no material future earnings or cash flow exposures from changes in
interest rates on our long-term debt obligations, as substantially all of our
long-term debt obligations are fixed rate obligations.
Year 2000 Date Conversion
The Year 2000 conversion issue, which involved the millennial date change
from 1999 to 2000, threatened to impact computer programs and hardware timers
using two digits (rather than four) to define the applicable year. Prior to the
end of 1999, we completed our review of our system readiness for the processing
of date-sensitive information by our computerized information systems. Upon the
occurrence of the millennial date change, none of our computer systems appeared
to suffer material adverse effects from the Year 2000 conversion.
We incurred costs arising from our Year 2000 readiness process in the
amount of $6.3 million. Our review and related Year 2000 readiness activities
did not cause us to defer or forego, to any material degree, any other critical
Information Technology project.
You should be aware that there is the possibility of latent defects or
issues related to the Year 2000 conversion issue that could result in future
miscalculations or system failures. If we, our major vendors, our material
service providers or our customers fail to identify and address any latent Year
2000 issues in a timely manner, such failure could have a material adverse
effect on our business, results of operations and financial condition. We
depend on local exchange carriers, primarily the MegaBells, to provide most of
our local and some of our long distance services. To the extent Qwest and
SBC/Ameritech fail to address latent Year 2000 issues which might interfere with
their ability to fulfill their obligations to us, such interference could have a
material adverse effect on our future operations. If other telecommunications
carriers are unable to resolve such issues, it is likely that we will be
affected to a similar degree as others in the telecommunications industry.
Effects of New Accounting Standards
Accounting for Derivative Instruments and Hedging Activities
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities", as amended, is effective for
fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments and hedging activities by
requiring that entities recognize all derivatives as either assets or
liabilities at fair market value on the balance sheet. The Company does not
expect the impact of the adoption of SFAS No. 133 to be material to its results
of operations as it does not currently hold any derivative instruments or engage
in hedging activities.
Revenue Recognition
The effective date for Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition" has been delayed and must be adopted no later than the fourth
quarter of 2000. SAB No. 101 provides guidance on the recognition, presentation
and disclosure of revenue in financial statements. Management believes that
this statement will not have a material effect on results of operations and
financial position of the Company.
Inflation
We do not believe that inflation has had a significant impact on our
consolidated operations.
19
PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
During the period from April 1, 2000 through June 30, 2000, we issued and
sold the following equity securities not registered under the Securities Act of
1933, as amended:
On April 11, 2000 and June 6, 2000, we issued 45,675 and 91,350 shares,
respectively, of Class A common stock in connection with our acquisition of
LIVEware5.
The issuance of securities described above were made in reliance upon the
exemption from registration provided by Section 4(2) of the Securities Act or
Regulation D promulgated thereunder for transactions by an issuer not involving
any public offering. The recipients of securities in each such transaction
represented their intention to acquire the securities for investment only and
not with a view to or for distribution in connection with such transactions.
All recipients had adequate access to information about us through their
relationship with us or through information about us made available to them.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on May 31, 2000.
All of the proposals presented for stockholder consideration at the Annual
Meeting were approved. The following is a tabulation of the voting on each
proposal presented at the Annual Meeting and a listing of the directors whose
term of office as a director continued after the meeting.
Proposal 1 -- Election of Directors
a. By holders of Class A Common Stock
Term
Expires Votes For Votes Withheld
------- ----------- --------------
Clark E. McLeod 2003 174,703,111 1,176,611
James E. Hoffman 2003 174,789,403 1,090,319
Blake O. Fisher, Jr. 2002 174,680,870 1,198,852
Robert J. Currey 2002 173,661,755 2,217,967
Anne K. Bingaman 2001 174,749,287 1,130,435
b. By holders of Series B Preferred Stock
Term
Expires Votes For Votes Withheld
------- ----------- --------------
Theodore J. Forstmann 2003 275,000 0
Erskine B. Bowles 2003 275,000 0
Proposal 2 --Approve the Amended 1996 Employee Stock Option Plan
Votes For 133,509,916
Votes Against 37,772,229
Votes Withheld 4,597,577
Broker Non-Votes 0
Proposal 3 -- Amend the Certificate of Incorporation to increase the number of
authorized shares of Class A Common Stock to 2,000,000,000 from 1,000,000,000
Votes For 168,309,394
Votes Against 3,020,472
Votes Withheld 4,549,856
Broker Non-Votes 0
20
Proposal 4 -- Amend the Certificate of Incorporation to authorize a new class of
preferred stock in the amount of 10,000,000 shares
Votes For 105,347,130
Votes Against 53,359,345
Votes Withheld 4,578,527
Broker Non-Votes 12,594,720
Proposal 5 -- Amend the Certificate of Incorporation to require the unanimous
written consent of the stockholders to take corporate action of stockholders
without a meeting
Votes For 116,273,736
Votes Against 42,438,688
Votes Withheld 4,572,578
Broker Non-Votes 12,594,720
Proposal 6 -- Ratify the appointment of Arthur Andersen LLP as the Company's
independent public accountants
Votes For 175,820,786
Votes Against 29,433
Votes Withheld 29,503
Broker Non-Votes 0
Item 5. Other Information
On April 25, 2000 the Company signed an agreement with US West which addresses
extension of Centrex agreements, rates for interconnection related services and
resolution of other disputed items.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
- -------
Number Exhibit Description
- ------ -------------------
3.1 Amended and Restated Certificate of Incorporation of McLeod, Inc.
Filed as an exhibit to the McLeodUSA Registration Statement on Form S-
1, file no. 333-3112, and incorporated herein by reference.
3.3 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of McLeod, Inc. Filed as an exhibit to the McLeodUSA
Registration Statement on Form S-4, file no. 333-27647, and
incorporated herein by reference.
3.4 Certificate of Change of Registered Agent and Registered Office of
McLeodUSA Incorporated. Filed as an exhibit to the McLeodUSA Annual
Report on Form 10-K, file no. 0-20763, filed with the SEC on March 6,
1998 and incorporated herein by reference.
3.5 Certificate of Designations of the 6.75% Series A preferred stock.
Filed as an exhibit to the McLeodUSA Current Report on Form 8-K, file
no. 0-20763, filed with the SEC on August 9, 1999 and incorporated
herein by reference.
3.6 Certificate of Designations of the Series B preferred stock. Filed as
an exhibit to the McLeodUSA Registration Statement on Form S-4, file
no. 333-95941, and incorporated herein by reference.
3.7 Certificate of Designations of the Series C preferred stock. Filed as
an exhibit to the McLeodUSA Registration Statement on Form S-4, file
no. 333-95941, and incorporated herein by reference.
3.8 Amendment dated March 30, 2000 to Amended and Restated Certificate of
Incorporation of McLeodUSA Incorporated. Filed as an exhibit to the
McLeodUSA Quarterly Report on Form 10-Q, file no. 0-20763, filed with
the SEC on May 14, 2000 and incorporated herein by reference.
3.9 Amendment dated May 31, 2000 to Amended and Restated Certificate of
Incorporation of McLeodUSA Incorporated.
4.39 Credit Agreement dated as of May 31, 2000 among McLeodUSA
Incorporated, various Lenders and The Chase Manhattan Bank, as Agent.
4.40 Form of Promissory Note under the May 31, 2000 Credit Agreement
10.65 Fourth Amendment to Cost Sharing National IRU Agreement by and between
Level 3 Communications, LLC and Splitrock.
10.66 Fifth Amendment to Cost Sharing National IRU Agreement by and between
Level 3 Communications, LLC and Splitrock.
11.1 Statement regarding computation of loss per common share.
27.1 Financial Data Schedule.
21
(b) Reports on Form 8-K
On April 14, 2000, we filed a Current Report on Form 8-K to announce the
completion of the Splitrock Services, Inc. acquisition.
On May 24, 2000, we filed a Current Report on Form 8-K to announce our
intention to increase to $1.3 billion the size of our proposed senior secured
credit facilities.
On June 1, 2000, we filed a Current Report on Form 8-K to announce the
completion of the senior secured credit facilities and the commencement of a
tender offer to purchase the senior notes of Splitrock Services, Inc.
On June 13, 2000, we filed a Current Report on Form 8-K to present certain
financial statements required as a result of the acquisition of Splitrock
Services, Inc.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
McLEODUSA INCORPORATED
(registrant)
Date: August 14, 2000 By: /s/ Stephen C. Gray
--------------------------------------
Stephen C. Gray
President and Chief Operating Officer
Date: August 14, 2000 By: /s/ J. Lyle Patrick
--------------------------------------
J. Lyle Patrick
Chief Financial Officer
23
INDEX TO EXHIBITS
Sequentially
------------
Exhibit Numbered
- ------- --------
Number Exhibit Description Page
- ------- ------------------- ----
3.1 Amended and Restated Certificate of Incorporation of McLeod, Inc.
Filed as an exhibit to the McLeodUSA Registration Statement on Form
S-1, file no. 333-3112, and incorporated herein by reference.
3.3 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of McLeod, Inc. Filed as an exhibit to the McLeodUSA
Registration Statement on Form S-4, file no. 333-27647, and
incorporated herein by reference.
3.4 Certificate of Change of Registered Agent and Registered Office of
McLeodUSA Incorporated. Filed as an exhibit to the McLeodUSA Annual
Report on Form 10-K, file no. 0-20763, filed with the SEC on March 6,
1998 and incorporated herein by reference.
3.5 Certificate of Designations of the 6.75% Series A preferred stock.
Filed as an exhibit to the McLeodUSA Current Report on Form 8-K, file
no. 0-20763, filed with the SEC on August 9, 1999 and incorporated
herein by reference.
3.6 Certificate of Designations of the Series B preferred stock. Filed as
an exhibit to the McLeodUSA Registration Statement on Form S-4, file
no. 333-95941, and incorporated herein by reference.
3.7 Certificate of Designations of the Series C preferred stock. Filed as
an exhibit to the McLeodUSA Registration Statement on Form S-4, file
no. 333-95941, and incorporated herein by reference.
3.8 Amendment dated March 30, 2000 to Amended and Restated Certificate of
Incorporation of McLeodUSA Incorporated. Filed as an exhibit to the
McLeodUSA Quarterly Report on Form 10-Q, file no. 0-20763, filed with
the SEC on May 14, 2000 and incorporated herein by reference.
3.9 Amendment dated May 31, 2000 to Amended and Restated Certificate of
Incorporate of McLeodUSA Incorporated.
4.39 Credit Agreement dated as of May 31, 2000 among McLeodUSA
Incorporated, various Lenders and The Chase Manhattan Bank, as Agent.
4.40 Form of Promissory Note under the May 31, 2000 Credit Agreement.
10.65 Fourth Amendment to Cost Sharing National IRU Agreement by and
between Level 3 Communications, LLC and Splitrock.
10.66 Fifth Amendment to Cost Sharing National IRU Agreement by and between
Level 3 Communications, LLC and Splitrock.
11.1 Statement regarding computation of loss per common share.
27.1 Financial Data Schedule.